Federal Tax

Consolidated Returns — Investment Subsidiaries (Portfolio 755)

  • The Portfolio, Consolidated Returns-Investment in Subsidiaries analyzes the concepts involved in the ownership of subsidiary stock within a consolidated group.


Bloomberg Tax Portfolio, Consolidated Returns — Investment in Subsidiaries, No. 755, analyzes the concepts involved in the ownership of subsidiary stock within an affiliated group filing consolidated returns. Because consolidated returns result in the computation of a single tax liability for separate entities, application of the separate tax rules would lead to unjustified tax results. For example, a subsidiary’s income or losses could be reflected a second time as gain or loss on disposition of the subsidiary’s stock. Also, shifts of equity (dividends, nondividend distributions, liquidations, and redemptions) within the group would lead to substantially different tax results from economically similar transactions within a single corporation with several divisions. Similarly, intercompany transactions could lead to discontinuities in the earnings and profits of group members.

This Portfolio describes and analyzes: (1) the adjustments made to the basis of subsidiary stock to reflect the subsidiary’s income or losses; (2) the provisions in the regulations which minimize the tax consequences of intercompany dividends and nondividend distributions; (3) the special treatment of intercompany liquidations and redemptions; (4) the restoration to income of “excess losses,” which are amounts previously deducted as losses of a subsidiary and which exceed the group’s economic investment in the subsidiary; (5) computation of earnings and profits within an affiliated group; and (6) allocation of a group’s tax liability among its members.

For a discussion of eligibility to file consolidated returns and the scope of the consolidated return regulations, see 754 T.M., Consolidated Returns — Elections and Filing. For an analysis of: (1) the computation of separate taxable income; (2) the computation of consolidated income items, such as capital gain or loss and §1231 gain or loss; and (3) the computation of consolidated tax credits, see 756 T.M., Computation of Consolidated Tax Liability. For an analysis of the limitations imposed by the consolidated return regulations on the use of losses, such as the separate return limitation year rules and §382, see 757 T.M., Consolidated Return Regulations – Limitations on Losses.

Table of Contents

I. Introduction
II. Basis Adjustments
III. Excess Losses
IV. Intercompany § 301 Distributions
V. Intercompany Liquidations and Redemptions
VI. Intercompany Obligations
VII. Earnings and Profits
VIII. Allocation of Consolidated Tax Liability

George White
Adjunct Professor (deceased)
George Washington University
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